Greening the Economy Can Grow the Economy

The private sector needs to embrace sustainability and play a bigger role in funding the green transition (GX) to keep Japan on track to meet the government’s 150 trillion yen ($1 trillion) target, according to panelists at Nomura’s Transition Investments to Achieve Carbon Neutrality event.

The Japanese government announced its target in 2022 to help Japan achieve a GX, a shift to a low-carbon economy with a stable energy supply while maintaining economic growth. It has called for roughly 20 trillion yen in upfront investment funded by GX economy transition bonds, but that is far short of what is needed.

Tomohisa Murakami, Senior Corporate Managing Director for Investment Banking Product at Nomura Securities, noted that raising the remaining amount of investments must urgently be driven by the private sector.

However, he observed that in order to accelerate investments beyond current levels, private companies and market participants first need to recognize that GX investments will drive Japan’s economic growth.

While he expressed his support for the GX initiative itself, he cautioned that “Without that conviction, progress will not be made.”

Small steps and big challenges for the steel industry

Hiroyuki Tezuka, a Fellow at JFE Steel Corporation, said that his company has invested heavily in R&D and some small-scale pilot projects to reduce CO2 emissions. These include using hydrogen instead of coal to produce iron and installing innovative electric arc furnaces to produce high-performance steel from scrap and DRI.

While noting the challenges that would have to be overcome to adopt these options on a commercial scale, he said the company could not foresee which approaches would best serve the market’s demand, so they had to pursue all approaches in parallel.

“If they do not generate profit, they are not sustainable,” he said, adding that, whichever options they chose, the company would require predictable cash flow for a minimum of 20 years for commercial scale investments.

Tezuka noted that some of JFE’s investments in high-performance steel products will contribute to decarbonization of society. For example, ultra-high performance electrical steel sheets can extend the driving range of EVs and reduce transmission loss in power grids.

But he articulated a major concern related to the green premium inherent in many nascent low-carbon technologies, which puts them at a disadvantage compared to incumbents: if the company introduces expensive processes such as using hydrogen to make green steel, the value of the resulting steel itself remains the same.

The changing role of asset managers

Yutaka Naito, Managing Director at BlackRock noted the importance of blended finance — public–private partnerships — to mobilize capital.

Naito cited a blended finance initiative of the Monetary Authority of Singapore called Financing Asia’s Transition Partnership (FAST-P), which could provide useful insights for Japan. The ultimate goal of the FAST-P initiative is to mobilize US$4 billion in commercial capital by leveraging US$1 billion in catalytic funds that can absorb first-loss risk in order to support Asia’s green transition. As part of this initiative, there is a funding pillar aimed at providing debt financing to decarbonize hard-to-abate sectors in Southeast Asia, under which BlackRock serves as the appointed asset manager.

He noted that the Japanese government and Japanese institutional investors had shown interest in such an initiative.

How to increase GX investments

JFE Steel’s Tezuka spoke about the policy steps being implemented to build markets for green materials and products.

He said that the guidelines for public procurement of goods published in this year by Ministry of Environment now include a list that prioritizes the use of green steel. In addition, the government is increasing subsidies for purchases of products using green steel. Consumers who purchase Clean Energy Vehicles using green steel, for instance, will receive an extra 50,000 yen on top of other CEV subsidies.

While pilot initiatives like these are a positive step in developing the green market, Tezuka stated that they are still very small in scale and limited in scope. To realize steel investments at the trillion-yen scale, he said, the industry would need much broader adoption, such as in public construction projects, consumer appliances, and vehicles. He said that because the ultimate beneficiary of reduced CO2 levels is society, there should be mechanisms in place that enable society as a whole to share these costs.

Naito introduced a proposal presented by the Japan Asset Management Forum to explore aligning NISA, Japan’s tax exemption scheme for investments by individuals, with GX. The NISA system contains a list of designated indices that people can use for index investing, but currently none of them are related to sustainability leaving scope for a GX index to channel investments towards significant decarbonization projects.

A mindset transformation

Nomura Securities’ Murakami observed that people’s thinking about GX investments needs to change.

Murakami also reiterated the need to work with the public sector to help deliver the message of the importance of GX investments, set an overall policy direction, and build a national framework that supports investment, which includes defining appropriate returns and ensuring more stable cash flows.

For more information on this topic, please reach out to Tomohisa Murakami.